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Inflation and real GDP

  1. Nov 19, 2008 #1
    1. The problem statement, all variables and given/known data
    If nominal GDP grows with 7 % and the inflation is 2%
    What is the growth in real GDP


    3. The attempt at a solution

    is it 1.07/1.02

    or
    ln(1.07) - ln(1.02)

    ?
     
  2. jcsd
  3. Nov 19, 2008 #2

    Mark44

    Staff: Mentor

    In the absence of any other information, just subtract to get the real GDP growth rate. I don't think the problem is any more complicated than this.
     
  4. Nov 19, 2008 #3

    HallsofIvy

    User Avatar
    Staff Emeritus
    Science Advisor

    For example, suppose the initial GDP is 1.00 and it increases by 100G%- real increase in GDP is 1+ G. With 100I% inflation that would be an inflated value of (1+G)(1+ I)= 1+ G+ I+ IG or an "inflated" increase of G+ I+ IG. If that is what you are given, R= G+ I+ IG, and given I, then G= (R-I)/(1+I). However, assuming that I and G are small (0.07 and 0.02 are small) then IG is much smaller than either I or G (0.07*0.02= 0.0014) so approximately R= G+ I and G= R- I as Mark44 said.

    The simple .07- .02= .05 or 5% while the more complicated, but exact, (.07-.02)/(1+ .02)= 0.04902 or 4.902%. Your 1.07/1.02= 1.04902 would give that.
     
  5. Nov 20, 2008 #4
    Thanks
     
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